IR35 Explained: What you Need to Know, and What it Means for your Business
If you’re an employer receiving services from workers through an intermediary, it’s likely you’ve heard of IR35. You may also have heard that in just over four months’ time, the anti-avoidance tax legislation will be extended to the private sector. But what does this mean for UK SMEs, and what steps should be taken to ensure a smooth transition? We’re here to explore the IR35 regime in more detail – and how this could affect your business from April 2020.
IR35: when did it start and what does it mean?
Taking its name from the Inland Revenue press release announcing it, IR35 was created to tackle the issue of ‘deemed employment’ and tax avoidance both by workers and the employers who hire them – applying only to those individuals supplying their services via an intermediary (a personal service company or partnership). A set of tax laws that form part of the Finance Act, what was then known as the ‘Intermediaries Legislation’ first came into force in April 2000; the NICs element of this legislation then fell under the Social Security Contributions (Intermediaries) Regulations 2000, and the income tax element under the Income Tax (Earnings and Pensions) Act 2003 thereafter. In April 2017, ‘Off-Payroll Reforms’ – otherwise known as IR35 – represented a new piece of legislation then introduced to cover the public sector.
Having proven difficult to enforce, the updated rules of IR35 now comprise a new form of tax treatment whereby employees assess the status of contractors, and pay employment taxes in addition to those already paid to the contractor – now known as ‘Off-Payroll Tax’. For the workers themselves, this can reduce their net income by up to a quarter, costing them thousands of pounds in NICs and income tax. The proposed changes taking place from April 2020 will now require private sector businesses or the ‘end client’ to take sole responsibility of this legislation – as opposed to the intermediaries – ensuring they remain IR35-compliant (and thus avoiding unpaid tax liability).
How could this impact my business?
If you are a large or medium-sized incorporated or unincorporated enterprise, it’s like this will apply to you. With incorporated enterprises defined as ‘small businesses’ by HMRC, meeting two of the following statements would classify you as such:
- An annual turnover £10.2m or less
- A balance sheet total of £5.1m or less
- No more than 50 employees (on average)
Businesses engaging employees through an intermediary can avoid complications by following best practice from the outset, as failure to do so could result in further confusion down the line – and potential investigation by HMRC. Making as accurate an assessment as possible is crucial when hiring new workers (or reviewing existing contracts). This can be made via a status determination statement (SDS) providing evidence as to whether IR35 applies. While further official guidance is yet to be published, businesses failing to take ‘reasonable care’ – in the case where an SDS is dismissed by the intermediary and/or worker in question – could then be liable to account for PAYE and NICs.
In addition to the risk of inaccurate categorisation, workers affected by IR35 legislation may demand a pay increase and enhanced employee benefits, or choose to cease contracting with their current employers altogether due to the financial implications involved. While it’s important for businesses to get this right, the impact this could have on any existing workforce should also be carefully considered – particularly regarding any long-term hiring plans you may have.
What are the next steps?
If you’re still unsure as to whether IR35 applies to your company, take an online IR35 review test. If applicable, then prepare in advance by establishing the information-gathering process for the SDS, and how easily this could be implemented. You’ll also need to consider the true cost of these changes to your business, and how economically viable it is to be hiring contractors under the new legislation. Have these ready by early next year, and with updated guidance from HMRC, IR35 compliance will soon slot into your routine tax admin.
At Adams Moore, we specialise in tax planning for your business. From tax relief allowances to personal pension contributions, our expert team can advise on all aspects of your financial planning – paving the way for a brighter future. Get in touch to discuss your needs with a free accountancy consultation.